Tuesday, June 15, 2010

About the only issue that bothers me more than the occasional abuse of a few highly paid charitable leaders to condemn the whole sector is the regular reporting by the so-called “watchdog” charity rating agencies that use tax forms to determine the effectiveness of nonprofits. These are the types of ratings that perpetuate the “How much do they spend on overhead?” question instead of “What impact have they made on their community?” I wonder what they could determine from my tax forms?

Charity Navigator has released its annual ranking of charitable efficiency based on the Form 990 tax filings of some of the larger nonprofits they have reviewed in each of 30 communities – they poorly label the lists as “the largest” nonprofits in each city. I suppose I am more frustrated than usual because Indianapolis was near the bottom of the list and Cincinnati didn’t do much better, but my major concern is that the issues with this type of rating system are obvious and well-covered while the general public only sees the negative headlines. It is a classic case of making important what they can measure because they are not able to measure what is important. To their credit, Charity Navigator indicates on their website that they will be looking at additional aspects in their ratings – I’m anxious to see how they do it and wish them success with a very difficult task.

In case you are new to this discussion, here are the three points that stand out for me:

1) Demonizing infrastructure and Inaccurate completion of the Form 990 – a 2007 study by the Center on Philanthropy at Indiana University and the Urban Institute at http://nccsdataweb.urban.org/FAQ/index.php?category=51 emphasized the importance of adequate infrastructure for organizations to be able to effectively deliver quality programs. They also discovered that a significant percentage of Form 990s were incorrectly completed to show few or no funds spent on fund raising or administration. These misstatements can be attributed to a lack of knowledge or an organization’s decision to stretch the truth to look better to donors and rating agencies.

2) Organization Life Stage, Gift Size, or Aggressiveness in Fund Raising – A young organization with little public visibility is required to spend much more time and money to raise each new dollar, in small amounts from mainly new donors, often more than $1 for every $1 dollar it raises. In contrast, a well—established organization, with thousands of repeat donors making larger gifts, may spend less than 10 cents for each $1 raised.

3) Lack of comparative information on program impact – Measures of success are notoriously difficult in the nonprofit sector. Using tax form information is grasping at what little information is available and generalizing it to all the operations of that organization. An organization could have great financials and a low quality program or produce great results but not look very good on its Form 990.

Nonprofits are measured by a different yardstick than private businesses and that is appropriate, but it creates some tough questions for nonprofit staff and boards to deal with. When is it better to provide fewer services than to use more expensive options to raise more money? If a business puts a product on sale and narrows its margins in order to increase cash, they are being business-like. If a nonprofit spends 70 cents on the dollar to raise extra money to accomplish an important mission that would not otherwise be accomplished, they might be labeled as wasteful or inefficient.

When donors are making serious investments in organizations, they need to understand where that organization’s funding comes from and how it is used. Donors need to reward those organizations who are spending money to hire good people and enough people, reaching out aggressively to the public, and following a path of building personal relationships with the individuals and organizations who can make them financially sustainable in the long-run.